What is the Subprime Crisis?

All over the news people are talking about the mortgage crisis and the country plunging into a recession. For many people this is bad news, and they are worried, however for some people the situation is begging the question—is now the time to buy real estate?

One of the things I advise all my friends to do before making any investment is to work the numbers. What is your expected return? What are your other choices? One of the things I looked at recently was buying an investment property. New condos are springing up all over Seattle so I thought it might be a good time to buy something we could rent out. The first thing to do is to get out a spreadsheet and work the numbers. How much are you paying each month? How much does your investment appreciate? What is the interest on the loan? How much equity are you building? What are the costs to buy? What will your return be if you sell the property in one year? Two years? Seven years? These are all important data points to know in making these sorts of decisions.
So anyway, what is the subprime crisis everyone is talking about? Well basically the crisis is more of a liquidity crisis than anything else. Banks give loans to people, and then these loans are sold to other investors on Wall Street, which allow the banks to have more money to make new loans. However, because so many of the subprime loans went into default (a subprime loan is made to a less than desirable candidate) it has no become difficult for banks to sell their loans—so now lenders can’t create new business.

How did this happen? Well basically everyone got greedy. Lenders made loans they shouldn’t have (people with bad credit), people took loans that were risky starting at low interest rates that escalate over time, more people took out equity in their homes (people borrowing amounts 120% the value of their home) and used the money like credit cards, and builders built subdivisions the way rabbits multiply often fueled by the bad loans given by aforementioned lenders.

So should you buy a home? Well there is still a lot of concern home prices are going to continue to drop. I believe that this will continue through most of 2009 (if not longer—some economists are predicting this lasts until 2011). If that is the case, we will still continue to see home prices drop as less buyers are qualify for the loans need to increase demand. But there are exceptions….
Here are some things to know:

Loans are harder to get now, and there are new fees that are being added on to loans for people with low or marginal credit (they started last December). So if you credit score is below 700 you better spending time paying down debt, and boosting your score before trying to secure a mortgage.

As bad as the situation may seem, it is not equally distributed. Some states are far worse off than other states. Seattle’s housing prices have only dipped slightly, whereas places like Michigan and Ohio, where unemployment is high, or California and Florida, where supply is in excess, will continue to drive down prices. Make sure you research your state and city to be sure that any real estate you buy will maintain or hold its value.

And finally, with sliding prices and foreclosures the market is becoming a buyers market. People who I know are buying homes now are getting thousands knocked off the price and freebies to boot. Especially builders with new construction—there is a whole lot of unsold inventory. This means you can negotiate and get a much better deal than you could a few years ago.

So if you are looking to buy a house and you plan to stay in it a long time (you may have to ride out this “crisis” before you house starts appreciating in value), have good credit, and can afford the mortgage payment (rule of thumb is 28% of your income, and all debt payments—including car payments, student loans, etc—should not exceed 32% of your income) then it may be a great time buy; but, as with any big purchase, make sure you do your homework.

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Kate is known as one of the top technology leaders and CTOs. Her technical background is in creating and operating large-scale web applications. Her focus has primarily rested on SaaS applications and big data. She has extensive experience building and managing high-performance teams, and considers herself a fan of agile development practices and the lean startup movement. She is currently founding her own startup, popforms, but has held roles as developer, project manager, product manager, and people manager at great companies including Amazon and Microsoft. The last seven years she has been a VP of Engineering/CTO for companies like Moz, Decide (acquired by eBay), and Delve Networks (acquired by Limelight).
Kate is a keynote speaker, and she is also the curator of the Technology and Leadership Newsletter (TLN - www.techleadershipnews.com) and has a personal blog at katemats.com.